Last Updated on August 9, 2024 by Chin Yi Xuan
It’s difficult not to be amazed by the dynamics of the stock market.
It could be crazily calm and bullish for months, and ‘poooof’ – panic crash.
A panic selloff or crash for a longer period could happen for many reasons, but I do not intend to talk about it in this article. Chances are, you will be able to find out WHY the market does certain things at almost every corner online:
What’s underrated (and less talked about) is HOW to deal with a tricky or challenging market condition as an investor.
As such, my intention with this article is to produce a reflection, or guide that I’d come back to every time there is bloodshed in the stock market (for whatever reason).
I hope sharing this with you can help you handle the next (and inevitable) market selloff better than the previous ones.
Such is the life of an investor in the stock market. Let’s get started:
Table of Contents
“What’s your goal?” – How to be psychologically ahead of 99% of investors in the stock market
As cliché as it may be, I think being clear about why you invest is the most important thing in investing as it is something you could fall back on when things seem bleak and fearful.
Personally, I have 2 main portfolios and 2 clear goals with a timeline:
- Dividend investing (via my Freedom Fund) to complement my cashflow in about 15 – 20 years. Those would be the time of my life when my parents might need more care.
- Growth investing for my retirement in about 30 years, mainly through Exchange-Traded Funds (ETFs).
p.s. You can read about my investing strategies/approach HERE.
By setting a clear goal, I accomplish 3 specific things:
- The motivation behind WHY I invest (Complement cashflow and Retirement)
- A clear TIME FRAME of my investing journey (15 – 20 years and about 30 years)
- HOW I invest (Dividend and Growth Investing)
It is every investor’s responsibility to find out their goal. Again, it does not have to be complicated. Just cover 3 things:
- WHY do you invest? (I hope it’s not for quick money)
- What’s your investment TIME FRAME?
- HOW do you plan to invest?
Knowing these 3 would put you ahead of most people in the market as they give you:
- The conviction to stick to the plan during a challenging market.
- The temperament to not be influenced by short-term hype and news.
- Even better, the confidence to buy more when everyone is panicking
In the following section, let’s look at some useful perspectives about stock market selloffs.
Some useful perspectives about stock market selloffs
#1 Drawdown is common and inevitable
Stock market selloffs and crashes are part and parcel of investing. Do not let a relatively smooth 2023 and (most of) 2024 tell you otherwise:
If you invest in the US stock market (ie. the S&P 500), chances are high that you will experience a 5% drawdown almost every year. After all, it happened 94% of the time from 1928 – 2023.
Even the odds of a >20% drop in the stock market are not uncommon. It occurred 26% of the time in the past. Simply put, the stock market has experienced a big drop in 25 out of the past 96 years.
#2 The stock market went up regardless
Despite the high odds of a stock market drawdown, the S&P500 has grown by 898,634.26% from 1928 – 2023.
This translates to an annualized return of about 9.95%/year.
You don’t see this being mentioned as much on social media and news compared to reports about stock market crashes. Boring news does not attract eyeballs.
READ MORE: Intro & how to invest in the S&P500
#3 There’s always a reason to sell
It is easy to find reasons to sell and get out of the stock market in each panic selloff or market crash. Social media and news make it even easier.
Difficult times are when you fall back on your WHY in investing. You only need one WHY to stay the course.
#4 Time in the market > Timing the market
The ability to stay invested in the stock market is one of the most underrated skills of investing.
As I am writing this, we’ve just experienced one of the biggest panic selloff in recent years. Monday (5/8/2024) was full of fear and uncertainties.
Come Thursday (8/8/2024), the market bounced back, producing one of the best days in months/years.
Goes on to show how important it is to stay invested in order to participate in positive movements in the stock market.
We can’t enjoy the good stuffs if we cannot stick through the difficult times.
Common emotions and how to deal with them
The stock market is a fascinating place as it teaches us more lessons about ourselves than most other endeavours could, especially our emotions on money and risk.
Here are 4 emotions I experienced as an investor over the years.
Allow me to define them as I believe the clearer I can define these emotions, the better I am in managing them.
#1 Fear of missing out (FOMO)
The urge to buy without a clear plan or reason.
Common reasons for FOMO:
- Not having a clear idea about my investing goals, style or strategy (time to re-visit my WHY and HOW).
- I am turning speculative from my initial goal of long-term investing.
- I have been on social media for too long (log out!).
#2 The urge to sell out of fear
The urge to sell my holdings when the market is crashing or panicking.
Common reasons for the urge to sell out of fear:
- I do not know what I am investing in, hence I lack conviction or confidence to hold on to my investments (learn to build my own investment thesis).
- I am risking too much/I am investing using money I cannot afford to lose.
- I have been on social media for too long (log out!).
#3 The urge to time the market
The tendency to want to buy when the market is at its ‘lowest’ point. Ending up missing out when the market rebounds or recovers.
Common reasons for the urge to time the market:
- I think I am the stock market god (snap out of it!)
- I want to post about it and look cool on social media (ego).
- I got lucky a few times, and thought I could do it again (anchoring bias). Bad kind of lucky!
#4 Regret of not buying more when the market rebounds from a selloff
The strongest emotions of all, as it comes with the hindsight of ‘what could’ve been’.
Common reasons for regret of not buying more when the market rebounds:
- I think I can time the market (read Reason #3)
- Note to self: I only know this because it happened. Hindsight is worthless in a scenario like this.
The goal is NOT to avoid emotions while investing. It is learning how to deal with them better when we experience them.
3 final thoughts on investing during a stock market crash/bear market:
#1 Let’s take a step back: Do personal finance BEFORE investing
A common reason why one might feel the urge to sell out of fear is due to one risking money they cannot afford to lose.
In other words, we could be risking too much in the stock market that we get very sensitive to market moving against us.
One way I have managed this over the years is by building up more savings and emergency funds with time. This way, I know I do not need to rely on selling my long-term investments during a short-term uncertainty.
With a safety net of savings and an emergency fund, it has helped me keep my composure and allowed me to stick to my investing plan during a difficult market condition.
Do well in your personal finances and investing becomes easier.
FIND OUT MORE: My experience engaging a licensed financial planner in Malaysia
#2 Why I rarely pick stocks anymore
In recent years, I have switched a lot of my individual stocks to Exchange-Traded Funds (ETFs) like the S&P500 ETF and SCHD.
One reason is the convenience that ETFs bring to the table:
- Diversification – Reduce the risk of investing in individual stocks. The risk of individual companies going obsolete is way higher than the entire stock market.
- ETF screening process – Most ETFs are built with a screening process to include qualified stocks that fulfill their criteria, and exclude the ones that aren’t qualified.
ETF screening process is important, as it automates the stock selection process on investors’ behalf.
Let’s use S&P500 ETFs as an example. While the S&P500 has grown by 9.95% per year since 1928, the top stocks in the S&P500 are very different 30 years ago vs today:
In other words, time and market dynamics (such as a market crash) will make some individual companies obsolete, but the stock market tends to continue growing thanks to its built-in selection process.
#3 Learn to build your investment thesis
If you have bought stocks for the sake of buying (or FOMO), a market crash is a good learning opportunity to reassess your approach to investing.
Learning to form your investment thesis is a great way to enhance your conviction while facing a crash or panic market.
A simple (yet useful) thesis could be something like this:
- Why do I buy a stock/asset?
- How long am I planning to own it?
- Under what circumstances will I consider selling it? This is usually when there is no more reason to own the stock/asset, or when you have achieved your investment goal.
Verdict: Reminder to self – this is normal
I do not hate or like a market crash or bear market. For me, experiencing them is part of a journey of investing.
What I appreciate though, is the lessons that come with it:
It is not about avoiding a bear market or market crash. It is not about avoiding fear, FOMO, or regrets.
Rather, it is about how we learn to accept that these market phenomena and emotions are part of investing – it is our role to become a better investor with risk and uncertainties in an effort to grow our wealth.
Hope this makes sense!
Disclaimers
Any of the information above is produced with my own best effort and research.
This post is produced for general information purposes only. It is not intended to constitute professional advice, and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances.
The inclusion of Interactive Brokers’ (IBKR) name, logo or weblinks is present pursuant to an advertising arrangement only. IBKR is not a contributor, reviewer, provider or sponsor of content published on this site, and is not responsible for the accuracy of any products or services discussed.
